Swire Chin's List of International Bank Mergers

07 September, 2018

Welcome to Swire Chin’s List of
International Banking Mergers and Acquisitions. This web site aims to chronicle
the corporate genealogy and M&A history in the banking industry. Over 80 of
the world's largest and most well-known banks have been documented.Click on Indexto access all earlier publications. Existing
publications are updated whenever a major banking acquisition or divestment is announced.

Like many people nowadays, I’ve a love-hate relationship with banks. I do,
however, enjoy reading and recording the history of commercial banks. Please
feel free to email me if you’ve any comment. My email address can be found on
the "About Me" section of the web site.

Photo:
A bill of exchange, a sort of promissory note for making payment, dating from
1859. This is one of the earliest surviving documents from the Chartered
Mercantile Bank of India, London and China, which was known as the Mercantile
Bank of Bombay between 1853 and 1857; the Chartered Mercantile Bank of India,
London and China between 1857 and 1892; the Mercantile Bank of India between
1893 and 1957, and the Mercantile Bank Ltd. between 1958 and 1984.

Mercantile
Bank Ltd.

The
Mercantile Bank Ltd. had a very storied past full of ups and downs. It was once
upon a time a local Indian bank, then it became a British bank, and eventually
a Hong Kong bank in its final decades. The bank was founded in 1853 as the
Mercantile Bank of Bombay as a trade finance bank. By 1857,
the bank had opened offices in London, Madras (now Chennai), Colombo, Kandy,
Calcutta (now Kolkata), Singapore, Hong Kong, Canton (now Guangzhou), and
Shanghai.

In that same
year of Mercantile Bank of Bombay’s founding, however, the establishment of a
rival British overseas bank also with a focus on British India, China and the
colonies in the Orient applied for and obtained a Royal Charter from Queen
Victoria, and called itself the Chartered Bank of India, Australia and China
(today’s Standard Chartered plc).

A Royal
Charter used to be the only means to establish a public or
private corporation, but by the mid-19th century it certainly was
not the sole process to do so. While a Royal Charter defines a corporation’s
privileges and purposes such as those of a town or a city, the granting of such
by the Victorian era no longer indicated, for example, Royal patronage, nor implied
or express state guarantee in times of troubles. Even
though a Royal Charter is technically granted only to a body or business which
can demonstrate pre-eminence and stability, constitutionally or legally, there is
no reason to believe that a “chartered” business is any more or less likely to
be successful than those without a charter.

Nevertheless,
the Mercantile Bank of Bombay felt that it was at a competitive disadvantage
and did not want to be outdone by the regal sounding Chartered Bank of India,
Australia and China, which had a habit of promoting itself as being “Incorporated
in England by Royal Charter 1853.”Therefore,
in 1857, the Mercantile Bank of Bombay also obtained a Royal Charter and
renamed itself the Chartered Mercantile Bank of India, London and China, and
moved its head office from Bombay to London. In doing so, the Chartered
Mercantile Bank of India, London and China was often mixed up with the Chartered
Bank of India, Australia and China – the fact that both banks were founded in 1853
doubtlessly added to the confusion.

Following
the tradition in Great Britain at the time, banknotes in the British colonies
were often issued by certain authorised commercial banks. After receiving the
Royal Charter, the Chartered Mercantile Bank of India, London and China gained
the privilege to issue banknotes in Hong Kong (starting in 1859), in Penang
(starting in the 1860s) and later also in Malacca and Singapore. As a matter of fact, the bank played a prominent role in the early banking development in the
Straits Settlements and the Federated Malay States, which became today’s
Malaysia and Singapore.

In 1892,
however, the Chartered Mercantile Bank suffered a liquidity crisis and had its
Royal Charter revoked. It was re-capitalised as the Mercantile Bank of India in
1893, but it ceased to issue all banknotes.

In the early
20th century, growth returned to the Mercantile Bank of India and it,
for example, acquired the locally-incorporated Bank of Calcutta (founded 1895).

In 1912, the
Mercantile Bank regained the privilege to issue banknotes in Hong Kong. It also issued banknotes in the Chinese port city of Shanghai for years during the early 20th century. (Between 1846 and 1945, Great Britain controlled “concessions” -- extraterritorial jurisdictions -- in
China, and the Shanghai International Settlement was probably the most
well-known one of all.) Surviving 19th
century banknotes issued by the Chartered Mercantile Bank of India, London and
China from Hong Kong, Singapore, Malacca, and Penang; and even mid-20th
century examples by the Mercantile Bank of India from Hong Kong and Shanghai are very rare, and can command very significant valuations at auctions.

In 1916, the
Mercantile Bank of India took over the Bank of Mauritius. This was the third
bank of the same name – none of them were related to one another -- to have existed
in Mauritius. This particular Bank of Mauritius was established in 1894 to take over the
local operations of the Oriental Bank Corporation that had gone bankrupt. The Oriental
Bank Corporation was another prominent Anglo-Indian bank that was active in
British India, Ceylon, Singapore, Hong Kong and China in the mid-19th
century before its demise.

While rival
British overseas banks like the Chartered Bank of India, Australia and China
and The Hongkong and Shanghai Banking Corporation (HSBC) have had a strong focus
in Hong Kong, China and the rest of the Far East, the Mercantile Bank’s main
focus was in British India, where the bank had half of its branches.

In 1947,
British India gained independence and became India and Pakistan. The newly
formed nation-states wanted to nurture their own domestic industries and became
increasingly restrictive to the British businesses including the Mercantile
Bank of India. New regulations in place banned foreign banks from opening new
branches, and growth in the 1950s for the Mercantile Bank in India was much
hampered.

Towards the late
1950s, it was believed that the Mercantile Bank of India would be vulnerable to
a takeover by an American bank eager to have a presence (however restrictive) in
the Indian market. Ironically, right around the same time, the decision was
made to drop the reference of India from the name and the bank became the
Mercantile Bank Ltd.

In 1957, The
Hongkong and Shanghai Banking Corporation pre-empted the rumoured American
interest by first acquiring a 20% stake in Mercantile Bank Ltd., before fully acquiring
the remaining shares in 1959.

HSBC kept
the Mercantile Bank operations separate and independent for many years. In
1966, Mercantile Bank relocated its head office from London to Hong Kong. Interestingly,
Mercantile Bank continued to be a banknote issuer in Hong Kong until 1974 (along
with HSBC and the Standard Chartered Bank). In 1984, finally Mercantile Bank’s
operations were integrated into HSBC, except for the small Thai operations,
which were sold to Citibank. The sale of this small unit of the Mercantile Bank
appeared to have caused much confusion about the final years of the bank, as
many sources, including Wikipedia, often suggest mistakenly that HSBC sold the entire
Mercantile Bank to Citibank in 1984.

11 August, 2018

Photo: The Virgin Money lounge in
Sheffield, Yorkshire, has a complimentary bowling alley for clients to enjoy.
The insets show a Clydesdale Bank branch at London's Piccadilly Circus, and a
Yorkshire Bank branch in Whitby, North Yorkshire.

The Clydesdale Bank, Yorkshire Bank
and Virgin Money each has a complex history and relationship with each other
since their separate beginnings. They were established independently of each
other but interestingly, all three banks have been under partial or full
Australian ownership at one some point. Glasgow-based CYBG plc is the parent
company of Clydesdale Bank and Yorkshire Bank, which in May 2018 agreed to
acquire challenger bank Virgin Money for GBP 1.7-billion.

CYBG plc (Clydesdale Bank lineage)

The Clydesdale Banking Company was
founded by Glasgow’s businessmen in May 1838 in the joint-stock format to serve
the local market. The Clyde is a major river that flows through Glasgow, and
the vale area surrounding the river is called Clydesdale. Right from its start,
offices were opened in the industrial city of Glasgow as well as in the capital
city of Edinburgh about 40 miles to the east. Within its first year of
operations, Clydesdale also opened two country (rural) branches in Falkirk and
Campbeltown.

The 19th century was
the hundred years that witnessed the most rapid, disruptive and yet
transformative technological, social and economic changes in British history.
Newly-invented machinery greatly expanded the output of consumer and industrial
goods, as well as of agricultural produce. Meanwhile, the ever-expanding
railway network not only made transportation of raw materials, finished goods,
people and communications (such as news, letters and parcels) much faster and
cheaper, it also allowed perishable produce to reach destinations much farther
than previously possible before spoiling.

This mechanization and transportation
revolution, which was part of the overall industrial revolution, favoured
larger-scale farms and manufacturing factories over the one-person artisan
shops and small-scale farms that previously dominated the economy. This shift
towards larger scale operations required much larger capital investments and
financings, and the formerly local banks and small private banks were
ill-capitalized to support and take on the risk of these burgeoning capital-intensive
industries. During the mid-19th century, many of these small
provincial or private banks amalgamated with each other, and converted into
joint-stock banks that could raise capital by issuing new shares to
shareholders.

In 1840, Clydesdale Bank took over
the Greenock Union Bank. Despite that, by 1857, it still only had 13 branches
and remained a smallish bank. It was perhaps this prudence that kept the bank
in relative financial health, for in that same year, the 101-branch Western
Bank of Scotland, the second largest bank in Scotland at the time after the
Royal Bank of Scotland (RBS), collapsed during a general financial panic, and
Western Bank’s operations were broken up and taken over by other rivals,
including the RBS, Clydesdale and others. During the same crisis, the City of
Glasgow Bank also suspended payments (operations), and likewise some operations
were transferred to Clydesdale Bank, which doubled its number of its branches.

As London rose to become the premier
financial centre of the world in the second half of the 19th century,
Clydesdale Bank opened a branch in London in 1877. Back in 1874, Clydesdale Bank had opened a few branches in Northern
England in the area that is right next to its Scottish home market. But beyond
the these few “cross-border” branches, banking
in England, Scotland and Northern Ireland has historically been quite separate
from each other -- in other words -- English banks have very few branches and
minuscule market share in Scotland and Northern Ireland, and vice versa for the
Scottish and Northern Irish banks. This did not mean that banks from all three
"countries" could not acquire or control banks in each other's
territories, though this typically involved the much more powerful English
banks having a stake in Scottish or Northern Irish banks rather than the other
way around. (Unlike Scotland and Northern Ireland, Wales is not a separate
legal jurisdiction and its legal system is integrated with that of
England.)
Shortly after World War I, the smaller and weaker Scottish banks found
themselves facing challenging market conditions, and a wave of Anglo-Scottish
takeovers happened. In 1919, London City and Midland Bank (later becoming
Midland Bank and today’s HSBC), at the time the world’s largest bank based on
deposits, took over Clydesdale Bank. Then in 1923, Midland further
acquired the North of Scotland Bank. As in all Anglo-Scottish or Anglo-Irish
bank takeovers, the management, corporate identities, boards of directors and
operations of the acquired banks remain separate from the parent bank. Hence,
both Clydesdale and the North of Scotland enjoyed to a large degree their
autonomies. This only changed in 1950 when Midland’s two Scottish units were combined
to become the Clydesdale and North of Scotland Bank. Eventually, the rather
cumbersome name was shortened back to Clydesdale Bank.

In early-1980s,
Midland Bank itself became mired in the Latin American debt crisis, and had to
divest its loss-making businesses and raise new funds to shore up its depleted
capital. In 1987, Midland Bank sold Clydesdale Bank in Scotland (for GBP
420-million) and Northern Bank in Northern Ireland and Ireland (for a symbolic
AUD $2) to the National Australia Bank (NAB) group. NAB was at the time keen to
expand outside of its Australian and New Zealand home markets. In 1990, NAB
further acquired Yorkshire Bank for GBP 976-million (see separate section
below). These three purchases gave NAB a meaningful but if only regional
footprint in Northern England, Scotland, Ireland and Northern Ireland, but not
in the economic powerhouse in Greater London and Southern England.

During the early 2010s, however,
Clydesdale Bank and Yorkshire Bank were caught up in an industry-wide (in Great
Britain) unethical and fraudulent mis-selling and mis-handling of a financial
product known as payment protection insurance (PPI), negatively impacting
hundreds of thousands of affected clients.

Worse still, this PPI scandal broke
out in the midst of the decade-long worldwide credit crisis that began in 2007,
which resulted in soaring loan and trading losses, ultra-low interest rate
spreads (which adversely impacted bank profitability), reduced demands for
loans, little appetite for merger and other investment banking activities, and
the need to unwind risky and complex financial positions – a process often
called de-leveraging.

By 2014, NAB concluded its British
operations were too small to compete efficiently with the bigger players in the
market, and that it would be unaffordably costly to try to win market share. A
decision was made to exit the United Kingdom retail banking market. However, by
this time the PPI scandal had blown up into a very expensive mistake for both
Clydesdale and Yorkshire Banks. The two banks eventually had to set aside at
least GBP 2.1-billion of potential compensation to the PPI
claimants. In order to make Clydesdale and Yorkshire Banks a
financially viable autonomous business, NAB agreed to cover GBP 1.58-billion of
the PPI scandal provisions to relieve their financial pressure.

Finally, in early 2016, NAB spun off
and floated Clydesdale Bank and Yorkshire Bank under a holding company called
CYBG plc. NAB transferred 75% of CYBG shares to NAB shareholders, and sold the
remaining 25% stake to institutional shareholders. To allow the Australian
shareholders easy access to trade CYBG shares, CYBG was listed on both the
London Stock Exchange and the Australian Securities Exchange.

CYBG plc (Yorkshire Bank lineage)

In 1859, Yorkshireman Colonel Edward
Akroyd, a wealthy owner of large textile mills in Halifax, founded the West
Riding of Yorkshire Provident Society and Penny Savings Bank. His wish was to
encourage his workers to handle income prudently and to save for a rainy day.
Col. Akroyd was one of those Victorian benevolent industrialists who strongly
believed in caring for and improving the livelihoods of his employees and their
families. As a matter of fact, he even had housing complexes and a school built
right next to some of the factories where his workers worked.

As a provident society, the bank was
originally a co-operative (a mutual bank). The new bank took off to a great
start and began setting up offices in nearby towns. Being Britain’s largest
county, Yorkshire’s administration was divided into three “ridings”: East, West
and South. Col. Akroyd initially only had planned to operate in the West
Riding. But in 1861, the bank abandoned both the “provident society” format and
the West Riding focus, becoming the Yorkshire Penny Bank with well over 100
offices across the entire county.

Banking back then, particularly for a
penny bank catering to the working lower class, was very different from today.
The offices often amounted to no more than a counter located in a village
school room, or a church basement, and typically only opened for business one
evening a week. Yorkshire Penny Bank was said to be the first bank in the world
to introduce the “school bank” concept in 1865, maintaining accounts for school
children (as opposed to having an office inside a school for working adult
clients). The bank’s first full-time daily branch opened in 1871. In any case,
the Yorkshire Penny Bank became a local institution for the county.

Col. Edward Akroyd was so much loved
and respected that some 15,000 mourners showed up at his funeral in 1887. His
former residence in Halifax is now the Bankfield Museum.

In the 1911, however, an audit
determined that the Yorkshire Penny Bank’s reserves were significantly
underfunded and the Bank of England brokered a joint rescue-takeover of the
bank by a long list of English clearing banks: National Provincial Bank,
Westminster Bank, William Decons Bank, Lloyds Bank, Barclays Bank and Glyn
Mills.

At its centenary in 1959, the bank
adopted a simplified name of Yorkshire Bank.

In 1990, the National Australia Bank
(NAB) group was keen to expand in the British Isles after its 1987 takeover of
the Clydesdale Bank (in Scotland) and Northern Bank (in Northern Ireland and
Ireland) from Midland Bank. Meanwhile, the English banks controlling Yorkshire
Bank were also eager to divest their minority stakes, and Yorkshire Bank was
sold to NAB for GBP 976-million (USD $1.65-billion). At that time, National Westminster
(NatWest) held 40% of Yorkshire, Barclays (32%), Lloyds (20%) and the Royal
Bank of Scotland (the remaining 8%).

Virgin Money (pre-CYBG takeover)

Long dominated by historical banks
established in the 1600s, 1700s and 1800s, the British banking industry
witnessed monumental changes after the 2007 global credit crisis and the
technological disruption introduced by the internet and mobile phone in the 2010s.
One result of these changes was the rapid emergence of new, mostly “branchless”
banks, such as Virgin Money. This happened because: 1) the business of banking
has moved rapidly towards internet and mobile-phone banking away from in-person
branch banking; 2) the traditional “High Street” banks were busily cutting back
branches and staff to reduce costs following heavy losses from the credit
crisis; and 3) new banks with minimal numbers of branches have lower overhead
costs and can offer better rates and prices for their clients. In the United
Kingdom, these new banks are called “challenger banks” as they aimed to
challenge the long-established “High Street” banks.

Virgin Money itself has a very short
history, having been established only in 1995 initially as “Virgin Direct
Personal Financial Service Ltd.” by Sir Richard Branson’s Virgin Group.
Initially Virgin Direct was an income personal equity plan (known as “income
PEP”) platform as a 50-50 partnership with insurer and asset manager Norwich
Union. The income PEP was a registered account that allowed people over the age
of 18 to invest a maximum annual amount in shares of British companies
tax-free, meaning that the income and capital gains generated within the income
PEP were not taxable. In 1999, the British government replaced the income PEP
with the “Individual Savings Account” (ISA), which means that people are now
able to put their money into a savings account and term deposit to earn
interest tax-free, instead of being required to invest only in stocks that are
more risky.

By having a lower maintenance fees
than other financial institutions, Virgin Direct claimed that it received 4,000
phone calls on its opening day, and attracted GBP 42-million of assets under
management in the first month.

In 1996, Virgin launched the Virgin
Personal Pension product, again using the easy-to-understand and low-fee
strategy to lure new clients from the traditional financial-services firms.

By 1997, Virgin Direct had already
attracted GBP 1-billion in funds under management, at which time it launched
the One account in partnership with the Royal Bank of Scotland (RBS) and
Australian financial service group AMP (originally Australian Mutual Provident)
to offer the “offset mortgage” product. At its launch, RBS owned 50% of the One
account platform, with Virgin Direct and AMP each owning a 25% stake.

A traditional mortgage loan typically
has a set interest rate, a fixed repayment schedule, and strict limitations on
how much, if any, of the outstanding mortgage loan can be repaid ahead of (or
behind) schedule. An offset mortgage like the Virgin One, on the other hand,
charges interest on the outstanding mortgage balance less the balances in the
borrower’s savings accounts on a daily basis. In other words, every time money
is deposited into the borrower’s savings account (such as a payroll deposit),
the balance of the mortgage loan drops (hence “is offset”) by that deposit.
This flexible mortgage payment option has the potential to speed up
significantly the full repayment of the loan than a traditional mortgage.

Initially available only to Virgin
Direct’s 200,000-strong income PEP and Personal Pension clients, the One
account was so popular that it was expanded to the general public by 1998.

Also in 1997, Australia’s AMP
acquired Norwich Union’s 50% stake in Virgin Direct. As part of the agreement,
AMP gained the worldwide licence to use the “Virgin” brand in retail financial
services.

In 2000, Virgin Group once again
partnered with AMP to launch “virginmoney.com” as a one-stop on-line
“supermarket” for financial products such as ISAs, unit trusts (mutual funds),
mortgages and life insurance.

In 2001, the Royal Bank of Scotland
took over the Virgin One mortgage platform from Virgin Direct (25%) and AMP
(25%) for about GBP 100-million. Virgin One had about 70,000 accounts and GBP
3.75-billion of mortgage receivables at that time.

In 2002, Virgin Direct and
VirginMoney.com were amalgamated to become Virgin Money, and continued to be
jointly-owned by Virgin Group and AMP. Meanwhile, Virgin Money launched its
first credit card offering. Despite the agreement with AMP to license the
“Virgin Direct” brand worldwide in 1997, it was only in 2003 that Virgin Money
Australia was launched to offer credit card products outside of Britain for the
first time. Virgin Money Australia eventually expanded into the superannuation,
mortgage and insurance business. Further expansion saw Virgin Money opening for
business in South Africa in 2006 and the United States in 2007. However, the
American banking market is incredibly competitive and difficult to penetrate.
Merely three years late, Virgin Money US was shuttered. And the South African
operations also remained minuscule.

In 2004, AMP spun off and floated its
British operations into HHG plc, which included the 50% stake in Virgin Money,
which HHG immediately sold to Virgin Group for GBP 90-million (AUD
$220-million), hence allowing Virgin Group to fully control Virgin Money for
the first time. Even though by now Virgin Money had over 700,000 clients across
Britain and GBP 4.7-billion of client assets, profits remained very slim.

In 2010, American billionaire
financier Wilbur Ross acquired a 21% stake in Virgin Money for GBP 100-million.
The following year, Virgin Money and Virgin Group, backed by Wilbur Ross and
Abu Dhabi investor Stanhope Investments, took over the nationalized regional
bank Northern Rock from the British Treasury for GBP 747-million in cash plus
GBP 150-million of debt funding. The British government had sunk GBP
1.4-billion back in 2007 to rescue and nationalize the bankrupt Northern Rock,
which had 75 branches at the time of the Virgin acquisition.

Following the combination, Virgin
Group’s stake in Virgin Money was diluted to 46%, with Wilbur Ross’s various
investment vehicles holding 44% and Stanhope Investments the remaining 10%.

The year 2011 also saw the opening of
the first Virgin Money lounges in Edinburgh and Norwich. Virgin Money lounges
are meant to give clients a place to relax and unwind. The lounges offer
complimentary refreshments, wi-fi internet service, newspapers, magazines and
iPads. Each lounge has a unique design, such as the imitation of the interior
of a Virgin Atlantic Airways airliner, or a bowling alley, or a cinema. Virgin
Money lounges are offered free of charge for community events after hours. As
of 2018, there are eight Virgin Money lounges.

Like its British parent, Virgin Money
Australia was never particularly successful nor profitable. In 2013,
conceding that its Australian business failed to gain market share and deliver
anticipated profitability, Virgin Money sold Virgin Money Australia to local
regional lender Bank of Queensland for AUD $40-million.

In 2014, Virgin Money was floated on
London stock exchange when owners Sir Richard Branson’s Virgin Group and Wilbur
Ross each unloaded about 15% of the bank. Following the IPO, both investors
retained about one-third of the British bank.

CYBG plc (doing business as Virgin
Money)

In May 2018, CYBG agreed to take over
Virgin Money for GBP 1.7-billion (USD $2.3-billion) in cash. The combined
operations would become the No. 6 bank in the United Kingdom with 6 million
clients. Despite that, the new bank would still only control about 2% of the
market share, compared with market leader Lloyds' 24% share. Virgin
Money’s 74 branches will be combined into CYBG’s 169-branch network, but branch
closures and 1,500 job losses are planned. Existing CYBG shareholders would own
62% of the new bank, with existing Virgin Money holders owning the rest. Virgin
Group’s stake in Virgin Money will fall from 34.8% to 13.1%.

In a rather controversial and
puzzling arrangement, the new bank plans to adopt the brand “Virgin Money” for
all of its “High Street” (i.e. retail banking) operations and will pay an
annual GBP 12-million licence fee to Virgin Group for the first three years,
rising to GBP 15-million in the fourth year, then a 1% annual royalty based on
revenue to Sir Richard Branson. Some existing clients and employees of both
Clydesdale and Yorkshires are also said to be dismayed about the branding
changes.

Furthermore, as one of the three clearing
banks in Scotland, Clydesdale Bank has been issuing part of the Scottish Pound
banknotes since its establishment in 1838. CYBG, Virgin Money and the Bank of
England had not clarified if Clydesdale’s banknote issuing privilege could be
transferred to Virgin Money, or if the new Virgin Money would keep the Scottish
Pound issue under “Clydesdale Bank.”